Threadneedle has added to US domestic cyclicals as its chief investment officer argues that Federal Reserve tapering might not present a threat to equity markets.
Market volatility has spiked in recent weeks as investors became more aware that the Fed could begin to slow the pace of its $85bn-a-month quantitative easing programme.
In his latest update, Threadneedle CIO Mark Burgess says the asset manager has added to its US cyclical exposure, particularly in housing-related stocks, while remaining cautious on defensive sectors such as utilities.
“Consumer confidence and expenditure are reasonably healthy and the housing market has shown a strong recovery, although this has been driven more by investors than occupiers,” he explains.
“Employment is growing at a steady pace and whilst corporate capital expenditure has been disappointing, we anticipate some acceleration in the second half of the year. Our confidence in the US recovery is growing.”
Global stockmarkets have fallen since Fed chairman Ben Bernanke’s comments on 22 May first brought tapering to their attention and further declines were seen when he confirmed QE could slow later in the year if the economy continues to improve.
However, Burgess points out that plans to taper QE are different from stimulus being withdrawn and highlights the positive messages behind Bernanke’s plans.
“Tapering is only a reduction in the level of the Federal Reserve’s monetary stimulus, not a traditional tightening. We expect official interest rates to remain extremely low for an extended period,” he says.
“The Federal Reserve’s action would be on account of improved economic momentum, and we believe that there will be very little inflationary pressure in the short term. This combination of better growth, low inflation and still stimulatory monetary policy should be a reasonable background for equity markets.”
Threadneedle remains overweight in equities and used the recent market correction to add to its Japanese exposure, moving to an overweight position. In the UK and Europe, the firm is more cautious on cyclicals but is looking to add to steady growth stocks such as consumer staples, while in Asia it is more favourable towards cyclicals exposed to the US such as technology companies.
But the asset management house has pulled money out the bond market on the back of the asset classes “very limited” long-term value.
“We have been well below benchmark in government bonds for some time but have recently reduced our exposure to investment grade corporate bonds, where spreads are likely to offer only limited protection in the event of rising government yields,” the CIO says.